Rising subsidy: We won’t be able to pay salaries — Governors lament
…Call for accountability, transparency in oil, gas revenues
…Nigeria heading towards bankruptcy — Barrister Madaki
…Give local refinery operations a chance — Ehindero
Abimbola Abatta, Ariemu Ogaga and Matthew Denis
Decline in revenue from the Federation Account triggered by the rising subsidy on petroleum products will prevent state governors from paying salaries in the coming months, Nigerian NewsDirect reports.
The 36 governors decried that the subsidy on Premium Motor Spirit (PMS) in particular, has placed a huge financial burden on the states.
The Governors under the aegis of Nigerian Governors Forum (NGF) hinted at this in a memo forwarded to the House of Representatives in response to the call for memoranda by the House’ adhoc committee, which is investigating the daily consumption of petrol in the country.
The memo, which dated July 1, 2022 was titled ‘Findings on the Volume of Fuel Consumed Daily in Nigeria,’ dated July 1, 2022, and addressed to committee’s Chairman, Abdulkadir Abdullahi.
However, to ease the pressure on government finances while also maximising socially responsible profit gain, the NGF called for greater accountability and transparency around oil and gas revenues.
In the memo signed by the Head, Legislative Liaison, Peace and Security, NGF, Fatima Usman Katsina, for Chairman of the Forum, the Governors referred the House to a November 2021 report by its National Executive Council’s ad hoc committee interfacing with the Nigeria National Petroleum Corporation on the appropriate pricing of PMS in Nigeria.
The governors said, “Although the operating environment has significantly worsened since the report was released, with NNPC now consistently reporting zero remittance to the Federation Accountant as profit from joint venture, production sharing contract and miscellaneous operations, the position of the forum remains generally the same.”
The NGF recalled how the report noted that the “federation (FAAC) net oil & gas revenues have been declining since 2019 and are projected to decline significantly in 2022 by between N3billion and up to N4.4billion unless action is taken now.”
The memo read in part, “The following are some of the major findings relating to the volume of fuel consumed in the country: Remittances to the Federation Account Allocation Committee have continued to shrink as NNPC recovers shortfall quite arbitrarily from the Federation’s crude oil sales revenue. FAAC deductions for PMS subsidy are above 2019 levels, even without adjusting for reduced purchasing power of the naira due to inflation and FX rate deterioration.
“An analysis of the average monthly PMS consumption by states showed that a third of the country accounts for over 65 per cent consumption of PMS. The analysis showed that the following States of Lagos, Oyo, Ogun, Abuja, Delta, Kano, Kwara, Edo, Rivers, Kaduna, Kebbi and Adamawa accounted for 65 per cent of PMS consumption in the country. Most states with high PMS consumption either have borders with neighbouring countries or are in close proximity, this has been an avenue for smugglers to benefit from profitable arbitrage opportunities in PMS pricing.
“Households directly consume only about 25 per cent of the PMS that is consumed nationally, with the remaining three-quarters being consumed by firms, MDAs, transport operators or smuggled to neighbouring countries where the PMS price is nearly three times what it is in Nigeria; and of the PMS consumed by households, the richest 40 per cent of households account for over three-quarters of the PMS purchased by households, while the poorest 40 per cent of households purchased less than 3 per cent of all PMS sold in Nigeria.
“In the current fiscal regime, remittances to FAAC would continue to shrink as NNPC recovers this shortfall from the Federation as a result of crude oil price recovery. The report recommended a PMS pricing structure that addresses regional arbitrage and smuggling of PMS and provides additional revenue to the Federation Account. There is a significant market opportunity for additional export revenue streams for Nigeria to be had given the price parity with our neighbouring countries.
“Privatisation of the three government refineries as is, or after their full rehabilitation if affordable and viable, and expediting the licensing procedure for modular refineries will reduce the recurring government expenditure on refinery maintenance and increase the country’s refining capacity.”
According to the memo, “Rising prices are pushing millions of Nigerians into poverty. Rising inflation between 2020 and 2021 is expected to have pushed an additional 5-6 million Nigerians into poverty. Food insecurity is increasing in both poor and non-poor households, with some adults skipping meals. Because inflation is high, even if it remains stable, it will continue to push many more Nigerians into poverty.
“Fiscal pressures are growing unsustainably with the PMS subsidy significantly reducing the flow of revenues into the Federation Account. Thirty-five out of 36 states are likely to see transfers from the federation fall (in nominal terms) between 2021 and 2022, with the average decline projected to be about 11 per cent. Most states are already experiencing fiscal stress, with 30 out of 36 states recording fiscal deficits in 2020, including Lagos and every oil-producing state except Akwa Ibom.”
The NGF further revealed that, “With the projected decline in gross distributable federation revenues in 2022, fiscal deficits and debt burdens will grow even larger and faster. This will mean that transfers from the federation will not be enough to cover even salaries, and certainly not recurrent costs, which are growing in nominal terms.
“With the coming into effect of the Petroleum Industry Act, gross oil & gas revenues could be (much) lower than currently projected because of the new fiscal terms and the earmarking of deductible revenues specified in the PIA, and that could reduce net oil & gas revenues even further.”
Nigeria heading towards bankruptcy if not urgently averted — Barrister Madaki
Reacting to the development on Thursday, an oil and gas expert and Managing Partner, BBH Consulting, Barr. Ameh Madaki said the report is an indication that the country is heading towards bankruptcy.
Madaki, who noted that the current application of subsidy is not only myopic but also ignorant and wasteful. This, he said, can be reversed with the application of the right principles of petroleum economics.
According to him, “Interesting analysis of the NGF shows that this gory report highlights the stark fact that the country is headed towards imminent bankruptcy if nothing drastic is done urgently.
“The fact still remains that the current application of subsidy is myopic, ignorant and wasteful and can be reversed to maximum advantage of the Nigerian economy, if the right principles are applied and the subsidy regime is implemented in a more sensible manner with the application of the right principles of petroleum economics. This is not rocket science, but it just entails thinking differently about the barrel, unlike what has been done wrongly for decades.
“When this is done, Nigeria can achieve a total stoppage of any form of payments of petroleum subsidy, thus immediately saving over N4 trillion annually; Zero increase in the current pump price of petroleum products. Harmonisation of the prices of all petroleum products – PMS, AGO and DPK at the current pump price of PMS.
Availability of products in all parts of Nigeria and neighbouring West African countries, thus eliminating the need to smuggle the products across our boarders while earning the much needed foreign exchange for the country from the sale of refined products. A system will also be put in place to accurately monitor daily consumption of petroleum products using available technology.
“The knowledge to achieve the above outcomes readily exists and only needs to be sought and obtained for the overall benefit of the national economy,” he stated.
FG must give local refinery operations a chance
On his part, the Lead Strategist of Nigerian Workforce Strategy and Enlightenment Centre (NIWOSEC), Dr David Kayode Ehindero stressed that the issues of subsidy payments, which has refused all strategy will one day kill Nigeria “if we don’t kill it.”
Dr Ehindero tasked the Federal Government to give operations of local refinery a chance to mitigate the issue.
He said, “I wonder why at all times when there is shortage of funds to states, the Governors are too quick to go for the salary of workers as the vulnerable group that will be affected.
“Why not other cost of overheads, like travel’s and tours, political appointees office maintenance, lavish Government domestic spendings, over-invoicing of contracts, etc. The mention of salaries is a pointer of bad attitude towards state human resources.
“It is pertinent to remind the Government to give operations of local refinery a chance so as not to keep paying for highly dollarised subsidy regime,” he added.
